Nearshoring in Mexico: A Mixed Bag

In the wake of global disruptions, nearshoring has burgeoned as a strategic pivot for manufacturers, particularly in Mexico, spotlighting a blend of prospects and hurdles in the evolving economic landscape, according to a recent report by S&P Global.

The report underscores the burgeoning popularity of nearshoring, especially following the unprecedented disruptions to supply chains in the aftermath of the COVID-19 pandemic and the conflict in Ukraine. With its geographical proximity to the U.S., a well-developed infrastructure, and a cost-effective labor pool, Mexico has surfaced as a pivotal player in the nearshoring arena.

The S&P Global Mexico Manufacturing PMI panel, which encompasses around 350 manufacturers in Mexico, participated in a special nearshoring survey in July 2023. The insights gleaned from the survey shed light on the impact of nearshoring on order books, future expectations, and anticipated challenges, segmented by detailed sector, region, and company workforce size.

A noteworthy revelation from the survey is that close to one-third of manufacturers forecast growth opportunities as a result of nearshoring. Nearshoring, defined as the practice of relocating suppliers closer to the domestic market, has witnessed a surge in interest since the pandemic, responding to the widespread disruption of supply chains across international borders, especially from Asia to the West.

However, the journey is not without its challenges. Mexican manufacturers identified several obstacles likely to hinder their ability to fully capitalize on nearshoring-related growth opportunities. The cost and availability of capital emerged as the top concern among businesses (41%), followed by legal and regulatory hurdles surrounding labor laws, intellectual property, data privacy, and taxation (34%). Security and labor shortages also featured on the list of potential risk factors.

The report also highlighted that Textiles & Clothing firms experienced the most significant gain in new orders due to nearshoring, with 45% of firms in this sector signaling sales growth over the past 12 months as a result of nearshoring. Meanwhile, sectors like Coke & Petroleum and Leather & Leather Products also witnessed positive sales developments in the past 12 months, with 33% and 31% respectively noting increases.

Large firms are poised to reap the most benefits from nearshoring, with 25% of all large companies indicating that demand for their products had improved over the past 12 months due to nearshoring, while 44% foresee growth in the year ahead. In contrast, only 8% of small-sized manufacturers linked sales growth in the 12 months to July to nearshoring, although 25% expect to benefit in the coming year.

Geographically, the Gulf Coast and Northern Mexico topped the rankings for demand growth over the last year owing to nearshoring, with 30% and 25% of firms respectively reporting an upturn in demand, and 40% and 32% foreseeing opportunities over the coming 12 months.